The Political Economy of Contemporary Spain

From Miracle to Mirage

Luis Buendía, Ricardo Molero-Simarro, Luis Buendía, Ricardo Molero-Simarro

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138305717
• eBook ISBN: 9781351394888
• Edition: 1
• Topic: Business
• Subtopic: International Business
• Index: Business

The so-called 'Spanish miracle', beginning in the mid-1990s, eventually became a nightmare for the majority of the population, culminating in the present-day economic and political crisis. This book explores the main features of the Spanish political-economic model during both the growth and crisis periods.

Analyzing the causes and consequences of the continuing economic crisis in Spain, this book delves into five analytical axes: the evolution of the growth model; the role of Spain in the international division of labor; the financial sector and its influence on the rest of the economy; changes in the labor market; and the distributional consequences of both the expansive phase and the later crisis. Furthermore, contributors examine the formation of a triangle of actors (the government sector, building sector, and financial capital) that shaped the Spanish growth model, together with the effects of Spain's membership in the Economic and Monetary Union. Also considering ecological problems, gender issues, and the immigration question, this book challenges the alleged recovery of living conditions during recent years, as well as the explanation of the crisis as the result of irrational behaviors or the greedy nature of certain actors.

The Political Economy of Contemporary Spain provides a coherent explanation of the Spanish economic crisis based on a pluralistic approach, while proposing several measures that could contribute to a transformation of Spain's economic and social models.

1 The accumulation model of the Spanish economy

Profitability, the real estate bubble, and sectoral imbalances

Juan Pablo Mateo and Miguel Montanyà Revuelto¹

Introduction

Our analysis begins with an explanation of the basic characteristics of the growth model of the Spanish economy. In particular, this first chapter addresses the dynamics followed by the process of capital accumulation in Spain during the period 1995–2015. The study of the economic performance requires consideration of both the fundamental features of the growth period (up to 2007–2008) and the specific aspects of the economic crisis that led to a long recession, still in effect today.² The two phenomena are interrelated, and investigation of the economic boom provides the keys to the subsequent crisis.

Theoretically, we commence with a political economy approach because the generation of surplus is considered the preeminent object of production. Therefore, the level of capital valorization, as reflected in the rate of profit, ultimately governs the process of capital accumulation and, consequently, cycles of expansion and crisis. However, the process of economic reproduction is inherently turbulent (Shaikh, 2016), subject to various contradictions, and takes different forms depending on the type of economy and its historical context.

In this sense, it is necessary to refer to the integration of Spain into the Economic and Monetary Union (EMU), the vital element of which (from the political economy perspective) is the formation of a space for valorization endowed with a common currency for heterogeneous economic structures in terms of productive development. Since 1997, a fixed nominal parity for Spain’s erstwhile national currency, the peseta, was established, and monetary integration took place in 1999, although the euro did not begin to physically circulate until January 1, 2002. The particularities of the Spanish economy were not independent of this integration. As we shall see in Chapter 2, the Spanish economy developed a dependent manner of insertion, both in terms of European integration and into the global economy. The country’s levels of mechanization and productivity have historically been lower than in more central economies, featuring specialization in branches with lower capital stock per worker, thus taking advantage of the lower costs of labor.

The peripheral nature of the Spanish economy within the European Union (EU) has had several implications, which will be addressed throughout this book. As we shall see in Chapter 2, the pattern of Spanish trade has long shown a tendency to generate deficits, as well as a persistent dependence on foreign capital in branches with greater technological intensity, a trend that became worse since Spain entered the common market. Chapter 3 shows that, because of Spain’s membership in the euro, the conditions for borrowing became more favorable; but with the outbreak of the crisis, finances were instrumental in fomenting an extraordinarily regressive restructuring process. Chapter 4 explains that high unemployment has been a peculiar feature of the Spanish economy since the crisis of the 1970s, allowing wage dynamics to be regulated, partly due to the influence of EU institutions, depending on the needs of capital accumulation, in contrast to the repressive mechanisms in force during the period of the dictatorship. In addition, Spain has suffered from underdevelopment of its welfare state, because its consolidation coincided partially with the neoliberal restructuring of the 1980s, aggravated later by the Growth and Stability Pact, as explained in Chapter 5. The victory of the Socialist Party in 1982 led, paradoxically, to a period of retreat for the labor movement, which has contributed to a progressive precariousness of labor and a worsening of the distribution of wealth and income in what has been historically one of the more unequal countries in Europe.

Given the integration of Spain into the EMU, the theoretical starting point for this chapter is the concept of the development of productive forces, an idea with a qualitative (structural) as well as a quantitative dimension. This development is reflected first in surplus production capacity, expressed in the profitability of capital, and second in indicators such as the degrees of mechanization of the productive process, productivity, and costs (competitiveness), along with the sectoral articulation, which in turn has determined the character of external insertion. Thus, the foundation of investment (I) is the rate of profit (r), which measures the amount of profit (p) per unit of capital (K), r = p/K.³ The growth of output (Q) depends on the investment, materialized in the stock of capital (K), in turn driven by the rate of profit. The profitability of capital can be related to several heterogeneous factors related to value added (VA), production technology, and the sphere of distribution:

$r=\frac{VA-W}{K}=\left(\frac{q-w}{\theta }\right)P_{yk}$

In capitalism, technical change takes the form of a tendency toward an increase in the quantity of means of production (mp) per unit of labor (L), which can be approached, even if imperfectly, with the K/L ratio, K/L= ϴ. This capital–labor ratio constitutes the mechanism to reduce costs by generating a margin of productivity (q) with respect to the real wage per worker (w), so that ϴ ultimately determines the evolution of productivity. To the extent that the achieved increase in output is lower than the increase in the quantity of capital stock required (i.e., productivity improvement is less than the increase in the capital–labor ratio, as may be expected as a tendency), the capital–output ratio (K/Q) (inverse of the product–capital ratio, or the ‘labor productivity of capital’) will be increased, meaning that the maximum rate of profit (r_max) will decrease, considering that price indices evolve in a balanced way (P_yk = P_y/P_k around unity):

$r_{max}=\frac{VA}{K}=\frac{q}{\theta }\iff P_{yk}\to 1$

Thus, the rate of profit depends positively on whether a given technical change can improve productivity, containing wages and relatively cheapening the capital stock assets.

However, the rate of capital accumulation depends instead on the differential of profitability in relation to the cost of financing (interest rates, i), or net profitability (r − i) (Shaikh, 2016). But because the level of ‘i’ depends on the total capacity to generate surplus, it is not independent of gross profitability.⁴ Therefore, the role of finance is conditioned by the level of productive development, and in particular by the process of capital valorization.

In the case of the Spanish economy, the process of capital accumulation since the late 1990s, and to a greater extent since 2002, has been driven by the revaluation of construction-related assets, especially residential assets. It can thus be characterized as real estate financial capitalism based on asset inflation (Rodríguez and López, 2010). To carry out a political economy analysis, it is necessary to provide the material basis for explaining the massive reorientation of capital towards these activities in opposition to other explanatory proposals based on agents’ preferences and their utility schemes. The construction sector has multiple direct and indirect connections with other non-financial activities: building materials, machinery, etc. (Cuadrado-Roura, 2010); and it requires a set of corollary services such as sewage, electricity, and water systems, as well as sanitary, educational, and cultural services, along with commercial and transport infrastructures. Thus, this activity is able to drive a process of accumulation and to configure (or restructure) a given economic structure. The axis of this accumulation model in Spain has had profound implications on the distribution of income, the financial sector, and sectoral and productive imbalances, as we will see throughout the book.

Nonetheless, the relevant dimension of housing is that, along with its character as a consumer good, it is an asset that can be bought and resold for profit. Its production requires a relatively long time frame, during which increases in the price of housing will raise profitability and attract more capital. In the short term, this price (which includes the land rent) can be determined by demand, because supply is relatively inelastic and takes some years to respond. Compared with the production of other goods, real estate prices may increase because the expectation of price rises leads to the property becoming not a consumer good, but an asset or means of valorization. Therefore, residential activity can form an alternative (secondary) circuit for the relatively autonomous investment of the primary sphere of value generation (Gotham, 2006).

In this chapter, we analyze the implications that these factors have had for Spain’s economic growth model. Specifically, the next section addresses the dynamics of capital accumulation during the most recent boom period and their implications in terms of aggregate demand. In the third section we explain how this process was truncated by a series of imbalances immanent to the process of accumulation, aggravated by sectoral imbalances (especially the aforementioned real estate bubble), all of which had significant implications for the evolution of demand and its economic relation with the environment. In the end, we conclude that all these imbalances have made the dynamics of accumulation unsustainable, until it broke down with the emergence of the crisis.

Macroeconomic dynamics: from growth to long depression

General aspects of the Spanish economy

In relation to the EU, the Spanish economic structure has featured greater participation by agrarian activities and by services oriented towards the hotel industry and commerce (due to the importance of tourism), with a lesser development of business services. In terms of industry, Spain maintains a relative specialization in manufactures of low and medium technological content, whereas the construction sector has played a central role in the process of accumulation (García and Myro, 2015).

In 1995, Spain’s GDP per employee accounted for 74% of the Eurozone-12 average, and since then that figure has grown by just over a third (36%) of the relative increase throughout the zone (AMECO, 2017). However, overall GDP growth averaged 3.8% per year in 1995–2007, and 3.6% to 2008, when GDP growth began to slow. In other words, Spain enjoyed one of the most intense growth rates of all the developed economies, whereas the EU-28, the Eurozone, and the OECD group averaged levels below 3% per annum (AMECO, 2017; OECD, 2017). In per capita terms, however, Spain’s average was lower, at 2.6%, closer to the level registered in the more advanced areas (at 2% to 2.2% per annum) (OECD, 2017). In the second quarter of 2008, Spain’s GDP stagnated, and in the following quarter it fell by 0.8% with respect to the previous quarter, commencing a sustained path of setbacks that in the fourth quarter of 2008 became absolute declines in year-on-year terms (INE, 2016b). In 2015, GDP at current prices was still 3.6% lower than that of 2008’s peak (INE, 2016a), indicating the serious depth of the Great Recession.

During the last expansionary cycle, the component that carried quantitatively more weight in the GDP was household consumption, although its relative participation diminished by four percentage points (Table 1.1). However, investment was the real engine in the boom. Economic expansion was characterized by an intense increase in gross fixed capital formation (GFCF), reaching 6.4% per year until 2007. This was higher than increases in private consumption, public spending, and exports, although imports rose by even more (at 8.6% per a...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• List of contributors
• Introduction: the political economy of the Spanish growth model and its structural adjustment process
• 1 The accumulation model of the Spanish economy: profitability, the real estate bubble, and sectoral imbalances
• 2 Spain’s external insertion: peripheral or not?
• 3 The Spanish financial sector: debt crisis and bailout
• 4 The Spanish labor market: on the path of flexibility and wage devaluation
• 5 The distributive pattern of the Spanish economy: the impact of adjustment on inequalities
• Conclusions: Spain’s lost decade
• Index